Yunhong Green CTI Ltd (YHGJ) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CTI Industries Corporation Year-End and Fourth Quarter 2017 Financial Results Conference Call. (Operator Instructions)

This conference call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things, the company's business strategy and growth strategy. Expressions, which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on this company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond their control. Future developments and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate.

With that, I would now like to turn the call over to Stephen Merrick, CEO. Please go ahead.

Good morning, everyone, and welcome to the CTI Industries' earnings conference call, in which we will report on our results for the fourth quarter of 2017 and for the full year as well as our developments in financing, our management, our initiatives and our business strategy.

I'm joined today on the call by Jeffrey Hyland, our President, who joined us in December; Frank Cesario, our Chief Financial Officer, who also joined us late last year; and Stan Brown, our Director of Investor Relations.

It's a pleasure to be able to report to you with both Jeff and Frank Cesario, who are 2 of the significant new members of our management team and who are central to our strategies for success this coming year and the implementation of our plans. Both of them will participate in this call.

At the conclusion of the call, we will provide an opportunity for those of you who want to, to ask questions.

First, let me say a few words about our status, some important developments and our strategies and plans.

Simply put, our bottom line results in 2017 were disappointing. Frank will provide a summary report on our financial results, but in the simplest terms, we lost money. However, I would like to provide you with some context to those results and share some very important developments with you, which I believe positions our company very well for a successful 2018 and beyond. We faced a number of challenges this past year. We needed to complete a new financing, which would pay off our outstanding bank and mezzanine loan obligations. We had an interest burden, particularly due to our then outstanding mezzanine debt of almost $1.6 million for the year. We had to incur large financial consulting, legal and transactional expenses in connection with both our existing debt obligations and the effort to identify and complete a new financing. We did not perform as well as we had hoped, particularly in the first half of the year. Our working capital resources were strained during the year, and we had an expense structure last year that was high for our level of sales and margins.

Despite all of these challenges, I would like to point out that our performance was actually better than it might seem when looking at the bottom line numbers. As you may recall in 2016, we had a onetime large Black Friday sale of vacuum sealing machines to a major retailer for $7.8 million in November, which skewed our numbers for that year. In fact, if you eliminate the Black Friday sale from 2016 revenues, our revenues for 2017 were essentially equal to 2016. And our fourth quarter 2017 revenues of $14,839,000 were $1.2 million greater than our fourth quarter 2016 revenues, if you eliminate the Black Friday sale.

In the fourth quarter, we did have income from operations of almost $600,000 and we had income from operations for the year of $630,000. Unfortunately, this income was more than offset by the large consulting and legal fees and transactional costs we incurred related to financing. The interest charges we had of almost $1.6 million and the onetime large tax charge we were required to take against our deferred tax assets because of the change in U.S. tax law.

Frank will review those results with you in a couple of minutes. What I feel is most important to share with you is that we've accomplished a great deal during the late months of 2017 and the first several months of 2018, which we believe positions our company to do well in 2018 and beyond.

In December, we were able to complete a refinancing with PNC Bank in which we received a 5-year term loan of $6 million and an $18 million revolving line of credit. With this financing, we were able to pay off both the entire amount of our previous bank and mezzanine financing and the repurchase of warrants associated with the mezzanine financing and to provide us with working capital.

Our Board of Directors determined during the course of last year that it was in the best interest of our company to strengthen our management team with key new executive talent. In December, we were fortunate that Jeff Hyland agreed to join our company as President. Jeff has over 30 years of management experience in consulting and with several companies and his experience ranges over finance, accounting, operations, sales, production and acquisitions. Jeff has an MBA from Northwestern University, Kellogg School of Business and is a CPA.

Additionally, we were fortunate to attract Frank Cesario to take over the position of Chief Financial Officer. Frank has an MBA from DePaul University, is a CPA and has over 26 years' experience as a financial executive and a chief financial officer with several companies.

At the same time, we retained Jeffrey Memenga as our Plant Manager. Jeff is a highly experienced Manufacturing Manager with over 28 years of experience. He brings both technical knowledge and leadership abilities to our team.

We also named [Manfred Jacoby,] our successful Managing Director of CTI Europe, to the additional position of Managing Director of our U.K. Operation.

With our retained strong personnel and sales purchasing and operational matters, we have formed a cohesive and experienced management team to lead our company, and I'm proud to be part of it.

Already our new management team has developed plans and undertaken initiatives in cost reduction, profit improvement, capacity increases, quality management and sales development.

And I will ask Jeff Hyland to share our work in that area with you. First, though, let me turn it over to Frank Cesario to review and comment on our financial results for the fourth quarter and full year 2017. Frank?

Thank you, Steve. Good morning, and thank you all for the warm welcome to CTI Industries. For those who haven't had a chance to review our financial release this morning, here are the highlights stated approximate terms.

As Steve mentioned, 2017 revenue was $56 million, roughly $8 million below the $64 million in 2016. The silver lining was the balloon sales, foil and latex, grew by $3.5 million combined. This could not offset the $10 million drop in vacuum sealing product sales after the hangover from the November 2016 Black Friday sale was felt during 2017. This revenue swing, along with costs associated with the refinancing efforts and the large expense incurred reducing the value of our deferred tax assets resulting from the change in U.S. tax law during December, combined to cause net income attributable to CTI of $0.7 million during 2016 to become a loss of $1.6 million during 2017. Why do I share Steve's confidence? We make products that are wanted and valued in the marketplace, we can work from there. We don't plan on going through another enormously expensive and resource-training refinancing effort as we did during 2017. The impact of the tax law changes was a onetime hit shared by many other companies with deferred tax assets, and fails to focus on what matters most: that we are likely to pay fewer dollars in tax over time. It's ironic that increasing tax rates causes deferred tax assets to become more valuable, but that means higher tax bills in the future. In our case, because the tax rate has dropped, shielding future taxable income becomes less valuable. But that ultimately means that tax payments will be lower in the future, ultimately a good thing now that we have the noncash charge behind us.

The other area that should be addressed here is our credit facility. We have 2 pieces of debt with PNC, a $6 million term loan that will be repaid $100,000 per month throughout its 5-year term, and a 5-year revolving credit facility worth up to $18 million based on the value of our assets, receivables and inventory supporting it. This structure fits well with one of our corporate goals, which is to gradually pay down our debt and gain flexibility by reducing our overall debt load. As much as I'd like to spend an hour on accounting topics, the areas that are going to drive the business are up next. We can address any accounting and financial issues during Q&A. Steve?

Thank you, Frank. Now I'd like to ask Jeff Hyland to speak to the initiatives that we have undertaken to drive our corporate performance.

Thank you, Steve. First, let me say that I'm pleased and honored to be part of the CTI team and very appreciative of the confidence that the board has placed in me. I've seen a lot of different companies in my career, and I can say that we've assembled an amazing management team with a highly skilled and committed group of employees. Upon joining CTI, we agreed upon an aggressive 100-day action plan that encompassed every aspect of the business. Within the first 2 weeks, each member of CTI's leadership team had a 100-day action plan as well. We shared the plan with the board and they have been extremely helpful to ensure accountability to the planned successful completion. During 2017, CTI embarked on 2 critical initiatives. The first was an expense reduction plan. This was critical because CTI needed the cash flow to support the anticipated debt service required after the refinancing. Over $2 million of expenses were permanently eliminated in the process. The second initiative was to refinance the company's bank debt. As Steve and Frank have explained, the refinancing was also successful and included CTI's entire previous bank debt tranches of senior term and mezzanine. One of my first primary objectives was to enhance the management team, which was quickly accomplished as Steve has already articulated. Through that process of enhancing the management team, we also implemented 3 critical objectives. First, we initiated weekly CTI leadership team meetings to ensure strong communication throughout all aspects of the business. Second, we've been enforcing with all CTI employees that they are critical to our success. And third, we initiated a monthly internal communication system to articulate with all of our employees of the noteworthy successes of the business. Personally, I'm very pleased to see how the leadership team and employees in all the locations are committed to the success of CTI.

Operationally, we're addressing of the mission-critical need for additional foil converting machine capacity and have added a new machine at Lake Barrington that is running approximately 20% faster than our existing converting machines due to technological advancements. We have its sister machine being constructed in our Guadalajara facility and the new machine is scheduled for completion next month. This additional capacity allows both improving quality, while fulfilling our growing demand from balloon customers.

Finally, on the operational side, we have initiated a repair and maintenance and machine upgrade program to enhance quality and improve efficiencies.

On an ongoing basis, we are striving to improve our operating, financial and cash flow results. As a result, we have initiated a new aggressive profit improvement plan that encompasses both revenue increases and expense reductions with some of those already impacting current results. This is a healthy process that should make us a better company in the short and long term.

For sales, we prepared and are implementing sales plans for each product line and geographic location with the objective of aggressive and profitable growth. We are already seeing the results of those efforts in new business and have won approximately $4.6 million of the opportunities. In addition to the new business won, our new sales pipeline report has over 50 new opportunities in various sales sizes covering all of our business lines. Items make it to the pipeline report only when they're chasing a specific, actionable opportunity. To be clear, by definition, a sales pipeline opportunity is not one business. It's a specific opportunity for new business. As you can imagine, we're thrilled with the sales team along with the support of our creative group, attacking the market to take market share from our competitors and creatively developing new products and revenue streams. Once we're comfortable with the success and proper cadence of these initiatives during 2018, we anticipate pursuing an inorganic growth strategy of acquisitions. We've already analyzed one acquisition and passed on it due to not being a strategic fit. With this acquisition strategy -- while this acquisition strategy is inconsistent with CTI's historic growth strategy, we believe that growth through acquisition is an important strategy to address our increasing customer demands, our current customer concentration and the opportunity for product line expansion. Steve?

Thanks, Jeff. That was great. I hope you can all see why I am inspired and energized by our management team and understand and believe in the commitment and our ability to perform. As Jeff indicated, the initial strategy and goal of this management team is to build a strong, financially stable and profitable business, founded on the current line of products we have: foil balloons, latex balloons, vacuum sealing products, Candy Blossoms, film products and home container products. As we achieve these goals, we intend to seek opportunities to extend our product lines by developing and introducing new products or by acquisition. We expect to be able to pursue the second stage of our strategy by the third quarter of 2018.

That concludes our report. At this point, we will open the call for questions. Operator, may we have your assistance, please?

(Operator Instructions) And our first question is from [Vincent Gargano].

So guys, just a quick history on myself. I've been a shareholder for over 4 years. Mr. Brown knows my support and loyalty. We've had many conversations over the years. It's been a disappointing 4 years. The call, the members of management seem excited, energized. So that's really enlightening, but I also have a few questions I'd like to maybe possibly have answered.

Please.

So I'm reading the release. It says you guys have sold $4.6 million in new business in the first quarter. There hasn't been one press release regarding any of these sales wins. Can you answer why that is?

Well, we will have a -- we're doing a quarterly report very quickly after our 10-K filing now. And so there will be information that is out in a very short order on the transactions we've done in the first quarter and which is over in a day.

Okay, but I understand that. I followed many companies. If I win a sales contract, I'm announcing a press release. I'm not saying anything about forward statements, not say anything about how much it's going to increase my EPS. It's just a sales win, and I would think you guys would want to celebrate that and get that out to the investing public. $4.6 million has got to be a few good sales?

Well, that -- that's right. Some of the issues that arise in specific releases on transactions is that often, and in a couple of cases it's very definitely so, the company with whom you do the transaction does not want public press releases using their names. And so we sometimes have limitations on the extent of which we can provide public information that identifies particular customers that we have because of the fact that they require us not to use their names.

Okay. It just seems like I'd be celebrating a win, or leaving their names in it. But have you guys seen any -- I'm sorry.

Yes. I hear you, and thank you for that thought process and we'll try to respond to it.

Yes, duly noted. And hopefully we'll have a lot more to share in the future here.

I mean, guys this is 4 years of -- you guys are in front of a computer, let's pull up the 5-year chart and take a look. I mean, it is painful, it's been painful and it's been story after story, a new machine and financing, blah, blah, blah. I'm in it to make money. I'm not getting a dividend, I'm not getting a salary. I've been loyal, I've been hearing story after story and it's just -- I don't see the emphasis on winning here and getting this price stock -- stock price up and the insight of buying has completely evaporated, dried up. There is very little confidence, in my opinion. And it's been a painful 4 years, financially, for me.

We will do everything we can to justify the commitment that you've made and to gain your confidence.

Are you guys seeing any decreased balloon sales with the force majeure on helium?

No. Not at all. In fact, the helium balloon sales have continued to increase. We had an increase last year in helium and have just every -- just about every year over the past several years, that has increased. Helium is -- there has been some recent publicity about the potential restrictions on the availability of helium. We haven't seen any significant effect on our sales or on the availability of helium in stores for balloons. So, so far, that has not been -- hasn't affected us. There was a time, 2 or 3 years ago, where there was a thought that there was going to be a significant helium shortage and that was pretty short-lived and really didn't have any real effect on the market.

Okay, good. Also, you guys said you've trimmed $2 million in costs out of business. Do you see further opportunities and reductions?

We are -- we're working on that in any number of ways. Just to give you some specifics, we significantly changed our health insurance program so that we saved, I think the number was -- what was it, Jeff, somewhere in the range of a couple of hundred -- $300,000 annually and -- on our health insurance program. That's one of around 10 or 15 initiatives that we have done in an effort to control expenses. One of the other things that we're doing is that we are moving some element of our production of foil balloons to Mexico, and the cost of production in Mexico is considerably less than it is here. So we have a savings of each unit that we make in Mexico. So there's a whole series of things like that, that we have done and are continuing to do.

Okay. Last part of the changes, Vincent, are related to operational improvements, purchasing, running the business smarter as far as what are utility utilization, just very specific down and dirty changes in the business model.

And the process improvements, which will lead to higher margins, it sounds great. So that's -- last question on fees. I know Mr. Schwan has since retired?

Yes.

He is the Chairman of our Board of Directors.

Okay. Last year, I asked a question and it was a pointed question and I kind of got a -- kind of a vague response. So I'm reading the DEF 14A filing, and this is from May of 2017. So this old news, but it's something that I asked last year. We're paying Mr. Schwan's golf Country Club fees, as a shareholder, for $13,000 for 2016. Is that something that will be targeted as a cost reduction? Because I really don't think I should be paying for his Country Club fees, and you guys are losing money?

So this is Frank. Let me do that one. Not targeted to any individual, as an entity, we've gone through a process of evaluating. What is it we do, right? And so as Steve has talked about, we have an ongoing process of, what is the company in the business of, what do we do and I think over time, you'll find with our disclosures that the identity of the company is changing and you'll see tangible results of that effort.

And you will be -- you will see that -- we will -- you will not see those kinds of personal expenses being paid by the company.

Right. Honestly, Steve, this has been years, I mean, how was this okay, ever, with losing money? It's one thing if you guys are -- excuse me, extremely profitable, but with losses, how is this even justifiable? It's troubling.

I -- we hear you and I think you will see from our reporting that we are responding specifically to that question.

Guys, honestly, I am cautious just with the history here. It sounds exciting. I think you guys are making the right moves. But again, I'm not in this for anything but stock appreciation. I mean, let's be honest, I'm not getting a dividend, I'm not getting salary. I have dead money in this company for 4 years. So hopefully the energy that I hear on the call and that the new management members is something to come, and I appreciate you answering my questions.

Thank you. Great questions. We're going to win over this together.

(Operator Instructions) And I'm showing no further questions. I would now like to turn the call back to Stephen Merrick for any further remarks.

Thank you very much. I appreciate your participating in our call and hearing our story. We are committed to our cause and are going to do -- use every one of our talents and abilities to achieve the success in this company, and for you, as shareholders of this company. We appreciate your participation and look forward to talking to you again soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone, have a great day.